Second Brexit referendum now most likely option

The Brexit deal presented by the prime minister, Theresa May, was overwhelmingly rejected in a parliamentary vote on January 15th. We believe that her "plan B" does not render the deal sufficiently acceptable to overturn the margin of defeat in a subsequent vote, particularly as it depends on securing further concessions from the EU.

There is unlikely to be a majority in parliament for alternative "soft" Brexit options. We now expect that a second referendum is the most likely outcome from the current political impasse.

A second referendum could make "no deal" or even "no Brexit" live political options. It would also extend the period of economic uncertainty associated with the outcome for Brexit, weighing on economic growth this year.

As a result, we are revising down our forecast for real GDP growth in 2019 to 1.1%, from 1.4% previously.

The overwhelming parliamentary defeat for Mrs May's Brexit deal—consisting of the withdrawal agreement and the political declaration negotiated with the EU in November 2018—on January 15th significantly reduced the chance that it would be ratified by the UK parliament before the UK's scheduled withdrawal from the EU on March 29th, and as a result we expect Brexit to be delayed. Mrs May had three sitting days to present an alternative "plan B", which she revealed on January 21st. The plan aims to involve the UK parliament more in the next phase of negotiations, and promises to protects workers' rights and find a better solution to the controversial Irish "backstop" arrangement in the withdrawal agreement.

May's "plan B" is unlikely to revive the Brexit deal

However, this plan is unlikely to generate sufficient parliamentary support for her deal in the next parliamentary vote, scheduled for January 29th. As before, getting her deal through parliament depends on how much the EU is willing to bend on the Irish backstop arrangement; the EU has repeatedly stated that it will not. Even if some legally binding and substantive changes to the backstop arrangement were possible, the margin of defeat for the deal, at 230 members of parliament (MPs)—the largest defeat ever incurred by a UK government—will be difficult to overturn. This is all the more true as some MPs rejected the deal in order to force other options on to the table, including a "soft" Brexit and a second referendum.

With the Brexit deal unlikely to be revived, the Brexit options have narrowed. In our view the probability of a second referendum being held to break the political deadlock has risen sharply. Despite Mrs May's reluctance to delay Brexit and her view that a second referendum would "set a difficult precedent", holding such a vote is likely to become the only way out of the current political deadlock. A second referendum represents a course of action that would give popular legitimacy to the government's approach to Brexit. This could include adopting a version of Mrs May's deal, leaving the EU without a deal, or even reversing Brexit. One downside from delaying Brexit to hold a referendum that includes the possibility of a vote for "no deal" is that it extends the period of economic uncertainty faced by businesses, weighing on activity in the near term. As a result, we are revising down our forecast for economic growth in the UK in 2019 to 1.1%, from 1.4% previously.

With Brexit delayed, what is the most likely course of action?

Second referendum (50% probability)

The task of getting the "plan B" version of Mrs May's deal approved will be difficult owing to the sizeable margin of defeat for the Brexit deal in the initial meaningful vote. The EU is unlikely to provide legally binding concessions that make the terms of the deal more palatable to UK MPs.

We now assign a 50% probability (up from 30% previously) to a second referendum being called to break the political deadlock and give the government popular legitimacy on how to proceed. The result of a second referendum will be influenced by the questions that it contains and how the vote is structured. Nevertheless, such a referendum will keep the deal negotiated by Mrs May a live political option. It also makes "no Brexit" (for which the UK would revoke Article 50) and even "no deal" (once the extended Article 50 window closes) possible.

May's "plan B" Brexit deal (20% probability)

Mrs May has resumed her campaign with MPs to get a version of the deal approved by the UK parliament in a subsequent vote by pursuing assurances from the EU on the terms of the Irish backstop arrangement. We assign a 20% probability (previously 40%) to Mrs May getting a version of her deal ultimately approved by parliament.

A "soft" Brexit option (15% probability)

An amendment to Brexit legislation has given MPs a say on the revised Brexit plan. It is possible that cross-party support will build to keep the UK in the European Economic Area and a customs union—the "Norway plus" option—or even a permanent customs union. We assign only a 15% probability to this outcome, as it prevents the UK from having an independent trade policy and the Norway option would mean a continuation of free movement of labour (a central issue in the Brexit vote), contributions to the EU budget and acceptance of some EU policies with no decision-making power.

General election (10% probability)

Jeremy Corbyn, the leader of the main opposition Labour party, proposed a motion of no confidence in the government, which failed on January 16th because Northern Ireland's Democratic Unionist Party (DUP) supported Mrs May's government. Opinion polls put the Conservatives and Labour on a broadly even footing at just under 40% of the vote each; the possibility that an early election might make Mr Corbyn prime minister makes it unlikely that the DUP will withdraw its support for the government in any future vote of no confidence.

No deal (5% probability)

The remaining possibility is that, having made further failed attempts to get a version of the Brexit deal approved by parliament, the government will face the Article 50 deadline once again, although amendments to the Brexit legislation may yet prevent "no deal" from becoming the default outcome. Nevertheless, this option could be voted for in the second referendum. We assign only a 5% probability to a "no deal" outcome.